Tax Tip: Become an LLC

Are you thinking about starting your own business? One of the most important decisions facing you is what form of business organization to choose. This choice will determine how your business will be taxed and the amount and type of paperwork and reporting that will be required.

You can choose to organize your business as a sole proprietorship, a partnership, a “C” corporation, an “S” corporation or a Limited Liability Corporation.

This article will discuss in detail the Limited Liability Company, or LLC, the new entity of choice for both experienced entrepreneurs and new startups. I will explain what an LLC is, why it is right for you, how to form one and how to operate as an LLC.

What is an LLC?

A Limited Liability Company is a legal form of business organization that combines the flexibility and ease of filing of a partnership or sole proprietorship with the limited liability protection of a corporation.

The LLC has been popular in Europe since it was first created by German law in 1892, but was not used in the U.S. until 1977, when Wyoming was the first state to enact LLC legislation. In 1988, the IRS agreed that an LLC would be taxed as a partnership, and allowed “pass-thru” status. All 50 states now have LLC acts.

Instead of stockholders or partners, an LLC has members who have basically the same rights and responsibilities as stockholders or partners.

What Does an LLC Do for You?

Perhaps the most important thing an LLC can do for a small business is to provide its owner or owners with a greater level of protection.  In most cases, the creditors of an LLC can’t take the personal assets of the owners to satisfy the debts or obligations of the LLC.

Limited liability means that a business owner’s personal financial liability is limited to the owner’s investment or equity in the business.  If a company whose owners have limited liability is sued, it is the company that is being sued and not the owners.

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